- Created on Monday, 11 October 2010 15:50
- Written by Sara Nunnally, Editor, Smart Investing Daily
- Hits: 2328
On Friday, gold futures for December finished at $1,345.30 an ounce... the second highest close on record. We spent some time last week discussing whether gold prices are overheated or not. Just before the weekend, the gold bugs spoke up about what factors are influencing prices.
Bloomberg surveyed 18 gold traders, analysts and investors at the end of last week and found that two-thirds predicted that gold prices would trend higher this week.
One of the reasons why is the Federal Reserve keeps talking about buying more government debt. I told you on Friday that this means the value of the U.S. dollar will keep falling. No surprise then that most traders and investors think gold prices will keep climbing.
Kitco News reporter Debbie Carlson said that another reason why gold prices may rally this week was Friday's jobs report.
"The expectations of a second round of quantitative easing from the U.S. are more likely," she wrote, "especially with Friday's jobs report, which showed the shedding of 95,000 jobs, putting pressure on the buck."
And with that pressure comes international concern.
U.S. Dollar Weighs on International Markets
This weekend (Friday and Saturday), the International Monetary Fund (IMF) met in Washington, D.C., to talk specifically about the impact of currency fluctuations, particularly as the U.S. dollar falls and emerging market currencies soar.
For a while now, international markets have been knocking the U.S. dollar for its sharp drops during the global financial crisis and its continued instability. Since the greenback is used in most trade transactions, and because the U.S. has sold huge amounts of Treasury bonds to other major economies, global markets can suffer when the U.S. dollar falls.
In turn, gold prices climb as demand for this safe haven turns gold into a major investment trend.
Now this investment demand is running smack into India's festival and weddings seasons. You'd think that such high prices would be keeping jewelry demand down, but actually, demand is up.
Gold.org, in conjunction with Adfero, Ltd., reports, "Imports of gold into Ahmedabad rose by nearly 25 per cent between July and September in the traditional upswing of trading in the precious metal, reports DNA India."
Imports topped 65.5 metric tons, or 2.3 million ounces.
When Will Gold Prices See a Correction?
And yet, for all this talk of bullish indicators for gold, this rally keeps pushing prices ever higher, and we've yet to see any correction or consolidation.
Prices have even popped above their sharp uptrend. Consider this chart from The Weekly Gold Digger:
From this chart's indicators, we see an overheated RSI and a massive spike in volume from Thursday's peak prices.
But Friday's action appears to have found support on that top trend line.
That sets up two technical scenarios. First, Friday's rebound could keep prices above this trend line, and with the economic factors still screaming "bullish" for gold, we might see prices shoot back up to the $1,360 level in short order.
The second scenario sees gold prices dip back into the established uptrend. Should this happen, you might see gold prices arch down to test that bottom trend line before continuing higher.
This would be a great time to establish a position, should you not have some sort of gold or gold-based investment in your portfolio.
But the next few days will be tricky, as gold prices try to make up their mind.
Either scenario still works with the majority of analysts' macro ideas about gold. The economic anchors around the U.S. dollar aren't going to go away any time soon. Perhaps not for decades... And in the meantime, gold will maintain its appeal as a hedge against a sinking dollar.
We'll be dedicating a chunk of time this week to gold as we continue to see record prices.
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